Product Standards Committee Explanation of Meeting Materials October 29, 2013 To accompany the October 29 draft of Group Term Life Insurance Uniform Standards for Accelerated Death Benefits ( Group Standards ), the Product Standards Committee ( PSC ) is also providing the following memorandum of supporting materials. The supporting materials memo was created to detail and track the PSC s deliberations on the Group Standards following its report to the Management Committee on August 23 that more time was needed to complete its recommendation on the public comments received by the Management Committee. During its deliberations, the PSC encountered additional questions from Compacting States. The PSC also considered suggestions raised during the IIPRC s 5-Year Review of Uniform Standards that could affect the Group Standards. The supporting materials memo was the PSC s working document to track its deliberations. The memo also sets forth background information about related NAIC, state and federal laws and regulations. The memo indicates that the PSC carefully reviewed all issues raised by all parties during the comment periods for both the Group Standards and the 5-year review. The October 29 draft of the Group Standards contains all substantive revisions recommended by the PSC marked with yellow highlighting. Further requests for comment are marked in the supporting materials memo with yellow highlighting. All other PSC outcomes are marked in bolded red text. Otherwise the supporting materials memo should be used as a transparent background record of the PSC s deliberations.
TO: FROM: Product Standards Committee IIPRC Office DATE: October 28, 2013 SUBJECT: Supporting Materials for Discussion regarding the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits and Individual Standards for Accelerated Death Benefits Background On April 12, 2012, after being recommended to the Management Committee by the Product Standards Committee (PSC), the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits was published for notice and comment. Written comments were received from the Idaho Department of Insurance and the Industry Advisory Committee (IAC). A public hearing was conducted during the Management Committee s July 22 nd conference call. During this conference call Commissioner Murphy asked the PSC to review the comments and report back to the Management Committee whether further changes were recommended. The PSC held a public conference call on August 13 th to receive comments on its proposed changes in response to Idaho s comments. The two key changes, which received no objections during the August 13 th public conference call, are as follows: Changing the language (deleting an introductory sentence and adding a separate provision) to emphasize the existing requirements that a terminal illness qualifying event must always be included and a single qualifying event must be sufficient to trigger or provide accelerated benefits. Changing the language to specify a chronic illness that is defined as a permanent inability to perform activities of daily living include the limitation of maximum of two activities of daily living. A. Issues On the August 20 th member-only PSC call, the following issues were raised: Issue 1. Would the use of the language maximum of two limit or prohibit companies that want to allow the inability to perform only one of the activities of daily living? How does 1
the maximum of two wording work with the IRC 7702B wording defining a chronically ill individual as being unable to perform at least two of the activities of daily living? Issue 2. Does the provision under qualifying events that allows a consumer to trigger the accelerated benefits for a specified medical condition that, in the absence of extensive or extraordinary medical treatment, would result in a drastically limited life span allow companies to file critical illness products that more appropriately fall under long-term care insurance or stand-alone health insurance? (This issue was not the subject of written comments submitted during the rulemaking period.) Issue 3. Whether the IAC comments submitted pursuant to the five-year review of the Individual Standards for Accelerated Death Benefits regarding removing the limitation that the Accelerated Death Benefit form not contain exclusions that are not also in the policy (see Substantive Change Item #6 under the IIPRC Office Report and Recommendation) also apply to the Exclusions provision [i.e., The form shall not contain exclusions for an accelerated death benefit that are not also exclusions for the group term life insurance in the certificate. ] currently in the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits? Issue 4. Further, the IIPRC Office was contacted on Monday, August 19 th by a member state that is not on the PSC and asked how the provisions of the chronic illness definition addressing federal requirements of IRC 7702B and IRC 101(g) interacted with other provisions of the uniform standard specifically: a. Must the insured wait 180 days under the interaction between D(1)(e)(ii)(I) -- chronic illness may also be defined... [f]or activities of daily living, requiring the inability to perform such activities to be for a period of at least 90 days and the provision under 2(H)(4) Qualifying Events elimination period [t]he term elimination period means a specified period of time not to exceed 90 days during which the Covered Person meeting the terms of the qualifying event. The elimination period begins on the first day that the Covered Person meets the terms of the qualifying event and ends at the end of the specified period. b. How does the federal requirement in D(1)(e)(ii)(II) chronic illness may also be defined... [f]or periodic payments, requiring a re-certification at the end of each benefit period interact with the provision under C(2)(a) Benefit options that [p]eriodic payments based on the continued survival or institutional confinements of a Covered Person are prohibited.? Issue 5. In the context of the five-year review process, a member of the PSC raised a concern about the disclaimer provision regarding eligibility for Medicaid or other government benefits or entitlements, and possible tax consequences of acceleration. The concern is that a company would construe a warning about creditor-coerced acceleration as a condition of eligibility, either directly by placing a condition in the form or indirectly by referring to the disclaimer in denying an application to accelerate. The member state requested that the standards address the issue of creditor coercion as a condition of eligibility. 2
B. Proposed Next Steps During the August 20 th member-only PSC conference call, the PSC wanted an opportunity to review the changes made in the Group Term Life Insurance Uniform Standard for Accelerated Death Benefits that were responsive to comments raised during the five-year review process and to review whether these changes should be clarified as well as extended to the Individual Standards for Accelerated Death Benefits. The IIPRC Office proposes the following steps to accomplish this approach: 1. Review the key changes made by the PSC to the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits originally transmitted to the PSC by the NAIC Life Subgroup in 2011 especially changes made to address comments that were raised/submitted under the five-year review process for the Individual Standards for Accelerated Death Benefits. 2. Identify the similarities and differences between the provisions in the NAIC Accelerated Benefits Model Regulation and the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits and Individual Standards for Accelerated Death Benefits. 3. Review the federal requirements for tax qualification of accelerated death benefit products -- IRC 101g (which uses the chronic illness definition of IRC 7702B) 4. Review the provisions in the uniform standards (including the individual long-term care uniform standards) that prevent long-term care or critical illness products from being filed under the Group Term Life Uniform Standards for Accelerated Death Benefits and the Individual Standards for Accelerated Death Benefits. 5. Address each issue from the August 20 th PSC call to determine if there are further changes or recommendations to the Group Term Life Uniform Standards for Accelerated Death Benefits. 6. Review the IIPRC Office Report and Recommendation regarding the items for the Individual Standards for Accelerated Death Benefits to determine if there are further changes or recommendations to the Individual Standards for Accelerated Death Benefits. 7. If there are changes or recommendations to the Individual Standards for Accelerated Death Benefits, determine if these changes should be applied or are applicable to the Group Term Life Uniform Standards for Accelerated Death Benefits. 3
STEP ONE KEY CHANGES MADE BY PSC TO ORIGINAL VERSION OF GROUP TERM LIFE UNIFORM STANDARD ACCELERATED DEATH BENEFITS TRANSMITTED BY NAIC The Group Term Life Uniform Standard for Accelerated Death Benefits was transmitted to the PSC in October 2011 along with the full set of standards for this particular product line and the PSC started its thorough review of this particular uniform standard in January 2013. The following are key changes the PSC made to this uniform standard during its review and consideration process: 1. Revision to definition of Accelerated Death Benefit to add that the advance payment is During the lifetime of the Covered Person [Change made to make more consistent with Individual Standards for Accelerated Death Benefits]. 2. Revision to definition of Qualifying Events to add the chronic illness definition/requirements in the Internal Revenue Code for recognition of favorable tax treatment of accelerated death payments. [Change made in response to comments submitted under the 5-year review process for the Individual Uniform Standards for Accelerated Death Benefits as well as feedback from the IIPRC Office regarding the language found in tax-qualified individual accelerated death benefit riders filed with the IIPRC]. 3. Revisions to limit the expense charges associated with the accelerated death benefit as a one-time charge and requiring a detailed justification if it exceeds $250. [Change made in response to comments submitted under the 5-year review process for the Individual Uniform Standards for Accelerated Death Benefits]. 4. Revisions to consolidate disclosure requirement regarding the effect of benefit payment on other benefit provisions into one section as opposed to two requiring the rider form to provide the same disclosure at (a) prior to or concurrent with the election to accelerate the death benefit and (b) upon the payment of the accelerated death benefit. [Change made in response to request for public comments. Note: this revision does not address the disclosure notice required by certain Compacting States at the time of sale of the product with an accelerated death benefit]. 5. Revisions to the provision regarding Qualifying Event to add a definition for waiting period to the subsection which provides the form shall not include a waiting period requirement. Add a new subsection indicating an elimination period for 2 of the 5 sections of the Qualifying Event definition (i.e., 3 continuous confinement and 5 chronic illness) is allowed and providing a definitions and conditions for an elimination period. [Change made in response to comments submitted under the 5-year review process for the Individual Uniform Standard for Accelerated Death Benefits]. The following changes to the Group Term Life Insurance Uniform Standard for Accelerated Death Benefits are currently under consideration by the PSC in response to the request by the 4
Management Committee to consider the public comments submitted during the formal rulemaking period to determine whether the PSC would recommend further changes: 1. Revisions to the definition of Qualifying Event to emphasize that a terminal illness qualifying event must always be included and that meeting the conditions of one of the specified qualifying events (when more than one is available in the benefit form) shall be sufficient to entitle the Covered Person to accelerate the death benefit. [Change made in response to comments from the Idaho Department of Insurance]. 2. Revisions to the chronic illness definition in the definition of Qualifying Event to replace the term specified number of activities of daily living with a maximum of two activities of daily living. [Change made in response to comments from the Idaho Department of Insurance]. 5
STEP TWO COMPARE CERTAIN PROVISIONS OF THE NAIC ACCELERATED DEATH BENEFITS MODEL REGULATION WITH THE GROUP AND INDIVIDUAL UNIFORM STANDARD PROVISIONS The definitions for Accelerated Death Benefit and Qualifying Event in the uniform standards closely follow the provisions of the NAIC Accelerated Death Benefits Model Regulation and the New Jersey Accelerated Death Benefits Model Regulation, which we understand was also used as a reference during the drafting of the Individual Uniform Standards for Accelerated Death Benefits). 1. DEFINITION FOR ACCELERATED DEATH BENEFIT: NAIC MODEL Accelerated benefits covered under this regulation are benefits payable under a life insurance contract: 1. To a policyowner or certificateholder, during the lifetime of the insured, in anticipation of death or upon the occurrence of specified life-threatening or catastrophic conditions as defined by the policy or rider; and 2. That reduce the death benefit otherwise payable under the life insurance contract; and 3. That are payable upon the occurrence of a single qualifying event that results in the payment of a benefit amount fixed at the time of acceleration. NEW JERSEY REGULATION "Accelerated death benefits" means the advance payment of some or all of the death proceeds payable under a life insurance policy or group certificate: 1. To the owner or certificate holder, during the lifetime of the insured, at the time of a qualifying event; 2. That reduces the death benefit otherwise payable under the policy or certificate; and 3. That is payable upon the occurrence of a single qualifying event resulting in the payment of a benefit amount fixed at the time of acceleration INDIVIDUAL UNIFORM STANDARD FOR ACCELERATED DEATH BENEFITS Accelerated death benefit means the advance payment of some or all of the death proceeds payable under a life insurance policy: 1. To the owner, during the lifetime of the insured at the time of a qualifying event; 2. That reduces the death benefit otherwise payable under the policy through a present value payment or imposition of a lien upon the death benefits; and 6
3. That are payable upon the occurrence of any single qualifying event with respect to the insured resulting in the payment of a benefit amount fixed at the time of acceleration. GROUP TERM LIFE UNIFORM STANDARD FOR ACCELERATED DEATH BENEFITS Accelerated death benefit means the advance payment of some or all of the death proceeds payable under a certificate: 1. During the lifetime of the Covered Person; 2. That reduces the death benefit otherwise payable under the certificate; and 3. That is payable upon the occurrence of a single qualifying event with respect to a Covered Person resulting in the payment of a benefit amount fixed at the time of acceleration. 2. DEFINITION FOR QUALIFYING EVENT: NAIC MODEL Qualifying event means one or more of the following: (1) A medical condition that would result in a drastically limited life span as specified in the contract, for example, twenty-four (24) months or less; (2) A medical condition that has required or requires extraordinary medical intervention, such as, but not limited to, major organ transplant or continuous artificial life support, without which the insured would die; (3) A condition that usually requires continuous confinement in an eligible institution as defined in the contract if the insured is expected to remain there for the rest of his or her life; (4) A medical condition that would, in the absence of extensive or extraordinary medical treatment, result in a drastically limited life span. Such conditions may include, BUT ARE NOT LIMITED TO, one or more of the following: (a) Coronary artery disease resulting in an acute infarction or requiring surgery; (b) Permanent neurological deficit resulting from cerebral vascular accident; (c) End stage renal failure; (d) Acquired Immune Deficiency Syndrome; or (e) Other medical conditions that the commissioner shall approve for any particular filing; or 7
(5) Other qualifying events that the commissioner shall approve for a particular filing. NEW JERSEY REGULATION "Qualifying event" means the following: 1. A medical condition that is reasonably expected to result in a drastically limited life span for the insured. The definition of a drastically limited life span shall have a minimum of "six months or less" and a maximum of "24 months or less" and shall be specified in the policy or certificate; and 2. At the option of the insurer, the policy or certificate may also include one or more of the following: i. A medical condition that requires extraordinary medical intervention, such as a major organ transplant or continuous artificial life support, without which the insured would die; ii. A condition that is reasonably expected to require continuous confinement in an institution, as defined in the policy or certificate, and the insured is expected to remain there for the rest of his or her life; iii. A specified medical condition that, in the absence of extensive or extraordinary medical treatment, would result in a drastically limited life span; iv. A chronic illness as defined in 26 U.S.C. 7702B(c)(2)(A), that is, a permanent inability to perform, without substantial assistance from another individual, a specified number of activities of daily living (bathing, continence, dressing, eating, toileting and transferring) and/or permanent severe cognitive impairment and similar forms of dementia; and v. Any other qualifying events which the Commissioner may approve. INDIVIDUAL STANDARDS FOR ACCELERATED DEATH BENEFITS Qualifying event means the following: 1. A medical condition that is reasonably expected to result in a drastically limited life span for the insured. The company s definition of a drastically limited life span shall have a minimum of 6 months or less and a maximum of 24 months or less, and shall be specified in the form; and, at the option of the company, may include one or more of the following: 2. A medical condition that requires extraordinary medical intervention, such as major organ transplant or continuous artificial life support, without which the insured would die; 8
3. A condition that usually requires continuous confinement in an institution, as defined in the form, and the insured is expected to remain there for the rest of his or her life; 4. A specified medical condition that, in the absence of extensive or extraordinary medical treatment, would result in a drastically limited life span; or 5. A chronic illness defined as permanent inability to perform, without substantial assistance from another individual, a specified number of activities of daily living (bathing, continence, dressing, eating, toileting and transferring), and/or permanent severe cognitive impairment and similar forms of dementia. GROUP TERM LIFE INSURANCE UNIFORM STANDARDS FOR ACCELERATED DEATH BENEFITS [Redlined with changes currently being considered by PSC] (1) Qualifying event means the following: (a) Terminal Illness. A medical condition that is reasonably expected to result in a drastically limited life span for a Covered Person. The insurance company s definition of a drastically limited life span shall have a minimum of 6 months or less and a maximum of 24 months or less, and shall be specified in the form; In addition to a terminal illness qualifying event, the insurance company may include one or more of the following qualifying events: (b) A medical condition that requires extraordinary medical intervention, such as major organ transplant or continuous artificial life support, without which a Covered Person would die; (c) A condition that is reasonably expected to require continuous confinement in an institution and the Covered Person is expected to remain there for the rest of the Covered Person s life. The term institution shall be defined in the form; (d) A specified medical condition that, in the absence of extensive or extraordinary medical treatment, would result in a drastically limited life span; or (e) (i) A chronic illness defined as permanent inability to perform, without substantial assistance from another individual, a specified number ofmaximum of two activities of daily living (bathing, continence, dressing, eating, toileting and transferring), and/or permanent severe cognitive impairment and similar forms of dementia. (ii) For purposes of complying with the requirements of IRC 7702B and IRC 101(g) ( federal requirements ), chronic illness may also be defined as prescribed in these federal requirements, such as: (I) For activities of daily living, requiring the inability to perform such activities to be for a period of at least 90 days; 9
(II) (III) For periodic payments, requiring a re-certification at the end of the end of each benefit period; and For cognitive impairment, requiring substantial supervision. (2) A Terminal Illness qualifying event must always be included. The insurance company may also provide accelerated benefits upon the occurrence of other qualifying events. If the accelerated death benefit provides multiple qualifying events, meeting the conditions of any one specified qualifying event shall by sufficient to entitle the Covered Person to accelerate the death benefit. 3. NAIC MODEL PROVISIONS NOT ADDRESSED IN THE UNIFORM STANDARDS When the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits was transmitted from the NAIC Life Subgroup to the PSC, it included the following note at the beginning: NOTE: Industry has asked the IIPRC to advise regarding the intent of the individual ACCB standards: no reference is made to Model #620. Sixteen states have adopted the Model which became one in 1990. A regulator drafted the standards without the Model since not many states had adopted it, it was much out of date and not very clear on intent (for example, in the DISCLOSURE section some of the items are not disclosures and there is no indication of when certain information needed to be disclosed). Some of the Model requirements did not make their way into the standards because the regulators probably did not believe them to be relevant at the time. In any case, it is not clear that if a company complies with the IIPRC standards, would any of the 16 states have an issue? Most of the provisions in the NAIC Accelerated Death Benefits Model Regulation appear to map to provisions in the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits and the Individual Standards for Accelerated Death Benefits with the following exceptions: Section 3. Type of Product Accelerated benefit riders and life insurance policies with accelerated benefit provisions are primarily mortality risks rather than morbidity risks. They are life insurance benefits subject to [State inserts sections referencing life insurance provisions]. Section 6. Disclosures C. Solicitations. (1) A written disclosure including, but not necessarily limited to, a brief description of the accelerated benefit and definitions of the conditions or occurrences triggering payment of the benefits shall be given to the applicant. The description shall include an explanation of any effect of the payment of a benefit on the policy s cash value, accumulation account, death benefit, premium, policy loans and policy liens. 10
(a) In the case of agent solicited insurance, the agent shall provide the disclosure form to the applicant prior to or concurrently with the application. Acknowledgment of the disclosure shall be signed by the applicant and writing agent. (b) In the case of a solicitation by direct response methods, the insurer shall provide the disclosure form to the applicant at the time the policy is delivered, with a notice that a full premium refund shall be received if the policy is returned to the company within the free look period. (c) In the case of group insurance policies, the disclosure form shall be contained as part of the certificate of coverage or any related document furnished by the insurer for the certificateholder. 11
STEP THREE REVIEW THE FEDERAL REQUIREMENTS FOR TAX QUALIFICATIONS OF ACCELERATED DEATH BENEFIT PRODUCTS IRC 101(g) (WHICH USES CHRONIC ILLNESS DEFINITION OF IRC 7702B) The following is an excerpt from the Executive Summary of an April 2012 Milliman Research Report entitled Chronic Illness Accelerated Death Benefit Riders which has a useful explanation of the interplay of the chronic illness definition under Internal Revenue Code 101(g), the NAIC Accelerated Death Benefits Model Regulation (#620), and the Individual Standards for Accelerated Death Benefits. Many companies offering chronic illness riders in the marketplace design their riders to comply with 101(g) requirements for an accelerated benefit design, because it means that the accelerated benefit payments received by the policyholder (subject to limitations for per-diem plans) are intended to qualify for favorable tax treatment under 101(g), or in other words, are intended to be tax-free to the policyholder. It should be noted that whether an individual s accelerated benefit payment in fact actually qualifies for this favorable tax treatment will depend on a number of specific circumstances. Therefore, the owner of such a plan is typically advised by the insurer to consult with a personal tax advisory regarding tax treatment of these proceeds. One challenge in structuring these plans is the 101(g) definition of chronic illness points back to the 7702(B) definition, which is the same section used to define triggers for LTCI products. However, Model Regulation 620 expressly precludes companies from marketing chronic illness riders as LTCI. In fact 3 of Model Regulation 620 states that the plans subject to that regulation reflect primarily life insurance risks and are treated as life insurance benefits. In reality, most chronic illness riders that are based on one of the first four qualifying events defined in Model Regulation 620 have more restrictive terms than the standards LTCI trigger definitions, so the prohibition of marketing those plans as LTCI is appropriate. The Interstate Insurance Product Regulation Compact (IIPRC)....contains a rule (item number 5 under the qualifying event definition) that is modeled after Model Regulation 620 and the 7702B definition of chronic illness but with the proviso that the trigger condition must be permanent. It is interesting to note that the IIPRC chronic illness definition is not as complete as that provided in the tax code. However, it should be noted that in order to meet the chronic illness rules of 101(g), it is further necessary that the benefit trigger require that the insured be chronically ill within the meaning of the tax law. 101(g) of the Internal Revenue Code recognizes favorable tax treatment of certain accelerated death benefits as follows: 12
For purposes of this section, the following amounts shall be treated as an amount paid by reason of the death of an insured: (A) Any amount received under a life insurance contract on the life of an insured who is a terminally ill individual. (B) Any amount received under a life insurance contract on the life of an insured who is a chronically ill individual. 101(g)(4)(A) defines terminally ill individual as an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification. 101(g)(4)(B) defines chronically ill individual as the meaning given such term by section 7702B(c)(2); except that such term shall not include a terminally ill individual. 7702B(c)(2)(A) provides: (A) In general. The term chronically ill individual means any individual who has been certified by a licensed health care practitioner as (i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity, (ii) having a level of disability similar (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described in clause (i), or (iii)requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment. Such term shall not include any individual otherwise meeting the requirements of the preceding sentence unless within the preceding 12-month period a licensed health care practitioner has certified that such individual meets such requirements. 101(g) also refers to the per diem limit in 7702B with respect to periodic payments to a chronically ill individual under an accelerated death benefit providing that when a periodic payment that exceeds a per diem limit, such excess shall be included in gross income. In its written comments under the 5-year review process, the IAC requested the 7702B definition of chronic illness be added along with the following language addressing per diem limitation: For the purposes of complying with the requirements of IRC Section 7702B and IRC Section 101(g) ( federal requirements ), the periodic benefit may be subject to the per diem specifications of the federal requirements to avoid tax consequences. If the application of the federal cap requirement results in a reduced accelerated death benefit from that requested, the remaining death benefit which can be accelerated will be available for acceleration in future months. 13
STEP FOUR PROVISIONS THAT PREVENT LONG-TERM CARE OR CRITICAL ILLNESS PRODUCTS FROM BEING FILED UNDER THE ACCELERATED DEATH BENEFIT UNIFORM STANDARDS There are several references within both the Individual Standards for Accelerated Death Benefits along with the Core Standards for Individual Long-Term Care Insurance Policies that prevent a long-term care insurance product from being filed as a life accelerated death benefit feature. Further, for other than an accelerated death benefit that triggers upon a terminal illness, the Individual Standards for Accelerated Death Benefit and the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits require a certification that the value and premium of the accelerated death benefit is incidental to the life coverage. The accelerated death benefit uniform standard for both individual and group life prohibit a premium charge or cost of insurance charge for a qualifying event described under item 1 of the Qualifying Events definition (i.e., terminal illness). When filing an individual accelerated death benefit rider that includes qualifying events described under items 2, 3, 4, and 5 (i.e., other than terminal illness), Compact filers are required to submit an Accelerated Death Benefit Incidental Value and Premium/Cost of Insurance Rate Relationship Certification based on Appendix A signed by a member of the American Academy of Actuaries. The Appendix A certification must demonstrate that the value of the accelerated death benefits provided on an aggregate basis, pursuant to a prescribed formula, does not exceed 10%. The formula requires showing the relationship between the net single premium for the base policy benefits assuming the non-death accelerated death benefit trigger and the net single premium for the base policy benefits assuming there is no accelerated death benefit. In addition, the Individual Standards for Accelerated Death Benefits and the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits explicitly provide that [p]roducts subject to these standards shall not be described as long-term care insurance or as providing long-term care benefits. Further, the Scope section for the individual uniform standard provides [t]hese standards shall not apply to long-term care insurance or products providing long-term care benefits as provided in the Interstate Insurance Product Regulation Commission standards for long-term care insurance. In the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits, the Scope section provides: [i]f the payment of accelerated death benefit is contingent upon receipt of long-term care services or support, these standards shall not apply and such benefit will be subject to the Interstate Insurance Product Regulation Commission standards for group long-term care insurance. The Core Standards for Individual Long-Term Care Insurance Policies has a detailed definition of long-term care insurance as follows: any insurance policy, rider, endorsement or amendment advertised, marketed, offered or designed to provide coverage for not less than twelve (12) consecutive months for each covered person on an expense incurred, indemnity, prepaid or other basis; for one or more necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance or personal care services, provided in a setting other than an acute care unit of a hospital, 14
unless the area of the hospital or unit where the services are provided is licensed or certified as a nursing care facility and the insured is receiving long-term care services and not acute care. The term includes: individual annuities, disability income and life insurance policies, riders, endorsements or amendments that provide directly or supplement long-term care insurance (emphasis added); policies, riders, endorsements or amendments that provide for payment of benefits based upon cognitive impairment or the loss of functional capacity; and qualified long-term care insurance policies. The term shall not include any insurance policy that is offered primarily to provide basic Medicare supplement coverage, basic hospital expense coverage, basic medical-surgical expense coverage, hospital confinement indemnity coverage, major medical expense coverage, disability income or related asset-protection coverage, accident only coverage, specified disease or specified accident coverage, or limited benefit health coverage. Following this definition of long-term care insurance in the Core Standards for Individual Long- Term Care Insurance Policies, certain exceptions are enumerated with respect to disability income, life insurance and annuities. With regards to life insurance, it provides: this term [long-term care insurance] shall not include life insurance policies that accelerate the death benefit specifically for one or more of the qualifying events of terminal illness, medical conditions requiring extraordinary medical intervention or permanent institutional confinement, and that provide the option of a lump-sum payment for those benefits and where neither the benefits nor the eligibility for the benefits is conditioned upon the receipt of long-term care. 15
STEP FIVE ADDRESS EACH ISSUE FROM THE AUGUST 20 th PSC CALL Issue 1. Would the use of the language maximum of two limit or prohibit companies that want to allow the inability to perform only one of the activities of daily living? How does the maximum of two wording work with the IRC 7702B wording defining a chronically ill individual as being unable to perform at least two of the activities of daily living. In response to Idaho s concern that the language in the chronic illness definition of the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits regarding specified number of activities of daily living could require the inability to perform all ADLs before triggering the benefit, the PSC recommended changing the wording to a maximum of two activities of daily living. On August 20 th, the question was raised whether the new wording could prohibit product designs that trigger the benefit upon the inability to perform only one of the activities of daily living. It may be useful to see how this issue was handled in the uniform standards for individual longterm care and disability income where a trigger based on activities of daily living is included: Core Standards for Individual Long-Term Care Insurance Policies: Eligibility for the payment of benefits shall not be more restrictive than requiring either a deficiency in the ability to perform not more than two of the activities of daily living or the presence of cognitive impairment. Standards for Individual Disability Income Insurance Policies: The definition/concept of Catastrophic Disability shall be triggered by an inability of the insured to perform, due to Injury or Sickness, a maximum (the company may reduce the number to one, but cannot raise it above two) of two activities of daily living (ADLs) out of the following six ADLs... If the PSC wishes to keep the maximum of two wording, it may wish to include the parenthetical that was included in the Standards for Individual Disability Income Insurance Policies. However, the PSC may wish to consider changing the language from a maximum of two to not more than two to match the wording of the Core Standards for Individual Long-Term Care Insurance Policies as qualified long-term care policies and riders under IRC 7702B and accelerated benefit riders to a life insurance policy under IRC 101g utilize the same definition of chronically ill individual which includes being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living.... In other words, the uniform standards would have consistency with regards to the chronic illness trigger based on activities of daily living. 16
For the PSC s consideration: The current provision in the Individual Standards for Accelerated Death Benefits and in the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits as recommended to the Management Committee on April 12 th : A chronic illness defined as permanent inability to perform, without substantial assistance from another individual, a specified number of activities of daily living (bathing, continence, dressing, eating, toileting and transferring), and/or permanent severe cognitive impairment and similar forms of dementia. The PSC s current recommended change to the provision in the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits to address Idaho s comments: A chronic illness defined as permanent inability to perform, without substantial assistance from another individual, a specified number ofmaximum of two activities of daily living (bathing, continence, dressing, eating, toileting and transferring), and/or permanent severe cognitive impairment and similar forms of dementia. Proposed for PSC consideration to make consistent with wording in the Core Standards for Individual Long-Term Care Insurance Policies and make this change for both the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits and the Individual Standards for Accelerated Death Benefits: A chronic illness defined as permanent inability to perform, without substantial assistance from another individual, a specified number no more than two of activities of daily living (bathing, continence, dressing, eating, toileting and transferring), and/or permanent severe cognitive impairment and similar forms of dementia. PSC OUTCOME: On 9/24, the PSC discussed and favored changing to no more than two. Issue 2. Does the provision under qualifying events that allows a consumer to trigger the accelerated benefits for a specified medical condition that, in the absence of extensive or extraordinary medical treatment, would result in a drastically limited life span allow companies to file critical illness products that more appropriately fall under long-term care insurance or stand-alone health insurance? (This issue was not the subject of written comments submitted during the rulemaking period.) A concern was raised by a member state during the August 20 th conference call that item 3 under the Qualifying Event definition under the accelerated death benefit standards would allow filers to submit critical illness or long-term care products that more appropriately fall under long-term care insurance or stand-alone health insurance. 17
As explained above, the drafters of both the Individual Standards for Accelerated Death Benefits and the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits included a requirement that the company s actuary demonstrate that the value and premium of the accelerated death benefit is incidental to the life coverage. This required demonstration and certification is an added protection that goes beyond the NAIC Accelerated Benefits Model Regulation. This particular qualifying event is found in both the NAIC Accelerated Benefits Model Regulation as well as New Jersey s accelerated death benefit regulation. Further, the scope of both the individual and group accelerated death benefit uniform standards provides products subject to such standards cannot be described as long-term care insurance or as providing longterm care benefits. The Individual Standards for Accelerated Death Benefits was implemented on May 31, 2007 and to date, the IIPRC Office has not received a concern from regulators in Compacting States that product filings reviewed and approved for compliance with the uniform standard exceeded the scope or should be considered a long-term care insurance or critical illness product. If the PSC wishes to provide more detail to the scope of these uniform standards, it may wish to consider the language in the NAIC Accelerated Benefits Model which provides Accelerated benefit riders and life insurance policies with accelerated benefit provisions are primarily mortality risks rather than morbidity risks. As stated above, the drafters of the uniform standards codified this provision by requiring the actuarial certification demonstrating the accelerated benefit provisions are incidental to the life coverage. Proposed for PSC consideration is to add the following language in bold to the Scope sections. These standards apply to accelerated death benefits that are built into individual life insurance policy forms or added to such policy forms by rider, endorsement, or amendment where the accelerated benefit provisions are primarily mortality risks rather than morbidity risks. PSC OUTCOME: On 9/24, the PSC concluded two weeks of discussion on this issue and determined no revisions to the proposed standards are necessary due to the mandatory terminal illness qualifying event and the actuarial certification, which applies when any qualifying event other than terminal illness is present and requires both the value of the benefit and any associated premium to be incidental to the life insurance coverage. It was confirmed that most filings the IIPRC has received under the individual standards do not include a separate premium for the accelerated death benefit, but a separate premium has occasionally been seen. This is consistent with the reported experience of PSC member states. There was also extended discussion about the safeguards in the subject uniform standards and the individual long-term care standards, which specifically carve out from the definition of long-term care insurance accelerated death benefits that provide the option of a lump-sum payment for those benefits and where neither the benefits nor the eligibility for the benefits is conditioned upon the receipt of long-term care. Issue 3. Whether the Industry Advisory Committee comments submitted pursuant to the five-year review of the Individual Standards for Accelerated Death Benefits 18
regarding removing the limitation that the Accelerated Death Benefit form not contain exclusions that are not also in the policy (see Substantive Change Item #6 under the IIPRC Office Report and Recommendation located on the Docket webpage ) also apply to the Exclusions provision [i.e., The form shall not contain exclusions for an accelerated death benefit that are not also exclusions for the group term life insurance in the certificate. ] currently in the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits? During the August 20 th conference call, a member state raised the concern that the IAC is requesting that the PSC consider removing or changing the Exclusions provision in the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits which currently provides: The form shall not contain exclusions for an accelerated death benefit that are not also exclusions for the group term life insurance in the certificate. The IAC is requesting the PSC consider removing this provision in the Individual Standards for Accelerated Death Benefits as provided in their written comments under the five-year review process. The IIPRC Office has confirmed with the IAC that it is not requesting this change be applied to the Exclusions provision of the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits. This position is consistent with the February 20 th draft of the group standards which includes a notation that the IAC s request to remove the provision does not apply to the Exclusions provision of the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits, based on the absence of underwriting at the individual level for the group product. The PSC does not need to consider whether or not to remove or change the Exclusion provision in the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits as the request from the IAC only applies to the Individual Standards for Accelerated Death Benefits. The PSC will consider this item when it reviews Substantive Change Item 6 in the IIPRC Report on the Five-Year Review Process. PSC OUTCOME: On 9/24, the PSC reviewed and accepted the recommendation that no revisions were necessary because the comment received during the 5-year review process does not apply to the uniform standards at issue. Issue 4. Further, the IIPRC Office was contacted on Monday, August 19 th by a member state that is not on the Product Standards Committee and asked how the provisions of the chronic illness definition addressing federal requirements of IRC 7702B and IRC 101(g) interacted with other provisions of the uniform standard specifically: a. Must the insured wait 180 days under the interaction between 5(1)(e)(ii)(I) -- chronic illness may also be defined... [f]or activities of daily living, requiring 19
the inability to perform such activities to be for a period of at least 90 days and the provision under 2(H)(4) Qualifying Events elimination period [t]the term elimination period means a specified period of time not to exceed 90 days during which the Covered Person meets the terms of the qualifying event. The elimination period begins on the first day that the Covered Person meets the terms of the qualifying event and ends at the end of the specified period. b. How does the federal requirement in the 7702B requirements for chronically ill individuals (i.e., 5(b) of the Qualifying Events definition of the Group Term Life Insurance) that chronic illness may also be defined... [f]or periodic payments, requiring a re-certification at the end of each benefit period interact with the provision under C(2)(a) Benefit options that [p]eriodic payments based on the continued survival or institutional confinements of a Covered Person are prohibited.? As explained above, the term and definition for elimination period was added during the PSC s review of this uniform standard and was intended to operate concurrently with the 90-day period specified in the IRC 7702B definition of chronically ill individual. However, the wording of the elimination period provision could be interpreted to mean that the elimination period starts on the first day after the Covered Person satisfies the IRC 7702B definition of chronically ill individual, i.e., inability to perform such activities for a period of 90 days. Proposed for PSC consideration is to revise the definition of elimination period to clarify that the 90-day period in IRC 7702B is the same 90-day period in the elimination period provision. Informal feedback from the Industry Advisory Committee confirms this interpretation. Further, it is important to remember that the current proposed uniform standards permit an elimination period only for the qualifying events of institutional confinement, chronic illness and cognitive impairment. Proposed changes in 2(H)(4) of the Group Term Life Insurance Uniform Standards for Accelerated Death Benefits are in bold below: (4) The form may include an elimination period for the qualifying events described in items 3 and 5 of the qualifying event definition in these standards. The term elimination period means a specified period of time not to exceed 90 days during which the Covered Person meets the terms of the qualifying event. The elimination period begins on the first day that the. meets the terms of the qualifying event and ends at the end of the specified period. The 90-day period specified in the definition of chronically ill individual for purposes of IRC 101g and 7702B shall run concurrently and not be in addition to the elimination period specified in the form. If at the time of applying for the accelerated death benefit, the Covered Person meets the terms of multiple qualifying events that are subject to elimination periods, the elimination period for each applicable qualifying event shall run concurrently. During the elimination period, the Covered Person is required to continuously meet the terms of the qualifying event without interruption. If at the end of the elimination period the Covered 20